I'm a member of the Forbes wealth team, covering the world's richest people. I'm also the author of Forbes' first graphic novel, The Zen of Steve Jobs. Previously, I've written for the Chicago Tribune and The Times of South Africa. My alma mater is Northwestern University's Medill School, which has recently altered its name to include a rambling string of words that I cannot be bothered to remember. Follow @CalebMelby and/or circle me on Google+

John Schnatter wants to raise the cost of your pizza in response to new health care costs. And his math kind of adds up.

Updates can now be found at the bottom of this post.

Papa John Schnatter is no fan of Obamacare. The CEO of Papa John’s International has occasionally railed against the reform for months. Leading up to the election, he was a Mitt Romney supporter and fundraiser. Now that the election is over, he’s doubling down on his claim that the health care reform will force his company to increase pizza prices by 10-14 cents a pie. He estimates that Obamacare will end up costing his company $5-8 million annually.

The issue: the Affordable Care Act dictates that full-time employees (30 hours or more per week) at companies with more than 50 workers need to be provided health insurance. Schnatter has further claimed that some employers will cut employee hours to avoid providing them with healthcare.

Meanwhile, shares in Papa John’s International have been tumbling since last Thursday, falling from $51.70 at market close Wednesday to $49.22 on Monday, a 4.2% drop.

Checking Papa Schnatter’s Math

Last year, Papa John’s International captured $1.218 billion in revenue. Total operating expenses were $1.131 billion. So if Schnatter’s math is accurate (Obamacare will cost his company $5-8 million more annually), then new regulation translates into a .4% to .7% (yes, fractions of a percent) expense increase. It’s difficult to set that ratio against the proposed pie increase, given size and topping differentials, but many of their large specialty pizzas run for $16. Remarkably, a 10-14 cent increase on a $16 pizza falls in a comparable range: .6% to.9%. But the cost transference becomes less equitable if you’re looking at medium pizzas, which run closer to $12, meaning a .8% to 1.15% price increase.

For the sake of argument, let’s say that Papa John’s sells exactly half medium/half large specialty pizzas. Averaging the ranges for both sizes, then averaging that product yields a .86% price increase — well outside the range of what Schnatter says Obamacare will cost him.

So how much would prices go up, under these 50/50 conditions, if they were to fairly reflect the increased cost of doing business onset by Obamacare? Update 12/5/12: an earlier version of this story estimated that a fair per pie cost increase to reflect additional expenses due to Obamacare to be 3.4 to 4.6 cents a pie. That was incorrect. The range is 5.6-9.8 cents per pie. This is still absolutely outside the range of proposed pie increases suggested by Schnatter at the time, and, as discussed in the comments, the range gives Schnatter a large benefit-of-the-doubt margin as the estimate assumes all pizzas are sold at specialty prices. In reality, many pizzas sold are at discount or coupon prices, and many pizzas are not specialty pizzas, but in fact cheaper pizzas with fewer toppings. Thanks to Daniel Kirchheimer for noticing the error.

In September, the company announced that it would be giving away 2 million free pizzas. That was, of course, a promotion designed to increase brand awareness and to invite consumers to try the brand — with the ultimate goal of selling more pizzas. Those giveaways can’t really be cataloged alongside sales that would have been made otherwise. But just in case you’re curious, that would be the equivalent of $24 million to $32 million in pizza revenue.

Necks In This Game

Standing to lose (or gain) as his company determines how best to operate under new regulations is Papa Schnatter himself, who owns 6,094,409 shares, or nearly one fourth, of Papa John’s, according to the company’s most recent annual report. 1,268,052 of those shares are held in a family limited partnership and 84,000 shares held in a 501(c)(3). The rest are directly owned. At the $49.44 share price, subtracting those held in a charitable trust, the remaining 6,010,409 shares are worth roughly $297 million. Schnatter’s compensation packages for years 2009-11 were $2,319,643, $2,614,516, and $2,745,219 respectively, also according to the annual report. Papa John’s International has not paid a dividend since 2005.

Also hanging in the balance are the shares of institutional investors FMR (11.6%), BlackRock (6.7%) and JP Morgan Chase (5%). But if these notions of protest materialize, Papa John’s front line will be populated by the franchise owners who operate many of its 4,000-plus international locations.

Emails sent to Papa John’s Investor Relations and calls placed to Papa John’s Public Relations were not immediately returned for comment.

Updates as of 9:15 p.m. EST.

1. First of all, I’m really enjoying the spirited conversation on this post.

2. With regard to the pizza giveaways. These are not “lost revenue.” They are a marketing tactic designed by the company to bring more consumers to Papa John’s, with the end goal of selling more pizzas and generating more revenue. It is a strategic investment. Further, the cost of giving away a pizza is not equal to the market value of that pizza. I apologize if that was not made clear above.

3. Some seem to think my analysis suggests I don’t appreciate a business’s duty to shareholders to maximize value. That is not in dispute. But (given the parameters I set up), using Schnatter’s figures, the costs his company will incur due to Obamacare are not equal to the pie increases he mentions. Those pie increases would more than make up for damage done to the company’s net income through increases to operational expenses. Of course, if he thinks it won’t harm the bottom line, he is absolutely allowed to increase prices further. Given inflation and expansion, his other expenses will obviously increase in the following years too. But attributing all price increases to Obamacare would be disingenuous.

5. Finally, I get the impression that Schnatter is attempting to communicate that there is no such thing as a free lunch, which is true. In the comments, many have mentioned that other companies will most likely need to increase prices in response to Obamacare. That is also true. The question that can’t be answered right now is: How will Schnatter’s open communication and politicization of price increases ultimately impact his company? Variables to consider: boycotts, counter-boycotts and shareholder perceptions of all the above. Previous case study: Chik-Fil-A.

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Comments

Wow, none of the math makes sense from Papa or Caleb. Papa John’s has 16,600 employees so you’re telling me they estimate Obamacare will cost them maybe $500 per employee per year. Let’s say half of his employees are already insured through Papa John’s current insurance subsidiary or maybe through spouse or parents. That’s $1,000 per uninsured employee. If it’s supposed to cover half of the uninsured, that’s $2,000 per employee. He’s either purchasing insurance that doesn’t exist for anybody else or he’s pushing so much of the premium on the employee that there’s no way they’d actually want it.

Additional side to the matter, Caleb may know how to read SEC filings but apparently knows very little about accounting or operations management. Like how you can’t push the entire cost of Obamacare to international sales ($58B), commissary sales ($508B), or to the franchise and royalty fees ($74.3B) because it’s a domestic regulation on probaby what is really only half Papa John’s business and those other sales are different customers. Do you know what Papa John’s cost in Venezuella. Probably not $16. Do you know of the aggressive tax structure of China, UK, and Canada that makes a simple thing like pizza way more expensive than in the US.

Caleb you can’t read SEC filings, but here’s a point in the matter that might help your case. I’m hoping you were keeping this in your pocket for the sake of simplicity to general readers.

You can probably apply more revenue to the base number in your per pizza figure because 80% of Papa Johns is franchise owned which means the entire revenue of all Papa Johns pizzas isn’t included in their income statement. If you assume the 20% that Papa Johns owns is representative of the 80% that are franchised, the per pizza actually get’s lower but still. We also don’t know the margins of those stores because they are largely in charge of their own promotions and costs. $1,000 – $2,000 per employee for health insurance because that’s what you get when you divided the number of uninsured at Papa John’s by the $8M. Where does that exist in a world where a $10/hr+tip employee can afford the employee share of the premium plus deductible plus the amount not non-reimbursed by the insurance companies.

To all these huge corporations that American society seems to adore, (unfortunately) give your employees a living wage and health benefits. Why do you or any of your investors need more millions in your pockets while your employees can’t even afford to take there selves to the doctor. “The American Dream” I think it’s SAD. Our own USPS wants to go down this same road. Huge numbers of part time employees with zero benefits. Our Postal executives are pushing for it RIGHT NOW in Congress. It is the ROAD to a failed nation.

I feel really bad for everybody at Papa Johns except Scnatter. There will be the impending boycott, Then if people who support Scnatter proudly call in to offset the boycot they put their stomaches in the hands of demoralized employees who have pretty much been told they are 2nd class citizens who don’t deserve healthcare by their CEO. I wouldn’t take a free pizza if I know there might be sick and disgruntled people handling it. So where does that leave the company? How do they fix this? Rats off a sinking ship IMHO. I give the company a year.

Caleb Melby – are you as stupid as your writing? Apparently you have no understanding as to how businesses actuall work. Do you know the difference between “profit” and “revenue”? Based on your writing, you have no clue.

Additionally, you confuse the revenue of Papa Johns the franchiser to the cost that the franchisee will see. Most of Papa Johns retail locations are owned by small businees owners. What Papa Johns as a corporate entity makes does not relate to the cost of producing a pizza. Papa Johns the Franchiser does not make many pizza’s. That task falls on the small Mom and Pop company that employes a bunch of High school kids with a small number of full time employees.

Glad to hear there were no actual term mix-ups. The increase in cost of pizza for consumers is designed to defray the cost of Obamacare. With pizza price increases, Papa John is increasing revenues to match increases in operational expenses, ideally to keep profit unharmed.